Having analysed each of the issues under the SERM criteria the owners of
the business can then build up a matrix and form a consensus view of the
scores to help rank the issues in order of high and low reputational risk
profile. This can build into a positive strategy to deal with this sensitive
matter of the reputation of the business.

It has been found when dealing with the reputation of an organisation and when
considering sustainable risk management that any surprises, even pleasant ones,
can unsettle stakeholders. Stakeholders like to know the companyâ€™s position
regarding the issues; the last thing an investor wants is to see a sudden upswing
in a companyâ€™s position when he has recently reduced his holding. Therefore an
overview of the relevant SERM stakeholder categories is set out below.

Stakeholder engagement
Further analysis will enable the owners to see the relationship between
the stakeholders and the issues in a new light. It will give them their over-
all view as to which stakeholders to target for engagement and to enter into
a dialogue with to see how their common interests can best be aligned.
The stakeholdersâ€™ view will often vary with how the owner sees the
issues. For example, in one case the owners may effectively be looking at
themselves perhaps for the first time in the mirror. On the other hand, the
view may be from the external perception of the stakeholders. Neither side
is right or wrong but where there is a difference of perception the owner
needs to know why? This forms the basis for constructive dialogue between
the stakeholders and owners. Well-managed stakeholder engagement leads
to transparency, which will ultimately prevent any â€˜nasty surprisesâ€™.
Any surprises, even pleasant ones, can unsettle stakeholders, they
like to know the companyâ€™s position regarding the issues â€“ the last thing
an investor wants is to see a sudden upswing in a companyâ€™s position hav-
ing recently reduced their holding.

Stakeholder review
The following section reviews the main stakeholder groups that should be con-
sidered for your assessment. The trends and drivers that emanate from these
stakeholder groups have been covered in Chapter 3 as well.
Chapter 9 â€“ Shareholder value and reputational risk 217

A Academic and research organisations
Academia research and government scientific research councils often conduct
research into risk. They contribute through the assessment of risk, the develop-
ment of responses, and prediction of future risk and monitoring of the effect of
preventive actions. Research organisations have raised the level of awareness of
the dangers posed by manmade chemicals (pesticides, fungicides, endocrine
fertility disrupters) and other influencers of human health. They can also pre-
vent a companyâ€™s products reaching the marketplace on health and safety
grounds, for example, or they are likely to be the source of research which has
a damaging effect on an existing product. This is especially true of regulated
industries like the pharmaceutical sector.

B Business partners, suppliers and trade bodies
Businesses are being encouraged to become more responsible, moral and eth-
ical as the public and government become infuriated at the end results of busi-
ness self-regulation. There are concepts of corporate social responsibility (CSR),
corporate accountability, sustainability, business durability and moves to
account for non-financial performance. Some prominent business organisa-
tions are also vociferous in promoting these concepts. The Confederation of
British Industry (CBI) proclaimed:
It is a prime responsibility of managements to ensure that companies are good corporate
citizens, caring not just for those with a direct stake in business â€“ shareholders, employ-
ees, customers, suppliers â€“ but for the general public and the environment, in the broad-
est sense of the term. Social responsibility encompasses many different aspects of
business life. It means putting customers first, and providing them with good, safe and
reliable products and services. It means being a first class employer, providing fair pay,
good conditions and decent pensions for employees. It involves genuine concern for
Part B â€“ Overview of the Economic Aspects of Business Risks
218

health and safety, and a commitment to good employee involvement and communica-
tions. (Quoted in A Practical Approach to Corporate Governance, Dr Saleem Sheikh,
Lexis Nexis Tolley (2003), p. 297.)

These concepts can help organisations and can also be used as a framework for
supplier selection.

Management of the issues
Having completed this stage of the exercise the owners should then con-
sider the companyâ€™s performance in managing these issues. They should
ask themselves the question, â€˜Is the company meeting the key stakehold-
ersâ€™ expectations?â€™
As part of the strategy, management systems, their implementation,
internal and external communications need to be assessed. A matrix
should be drawn up by the owners to consider the companyâ€™s overall per-
formance in managing the issues and agree â€˜risk reduction scoresâ€™.
As a guideline, under SERMâ€™s system the maximum risk reduction
factor is 5 and the minimum 1.

Suppliers: auditing and management systems
There is a wide variance in purchasing companiesâ€™ approaches to their sup-
pliersâ€™ environmental performance. Some companies make their supply chain
â€˜greenâ€™; this can involve excluding suppliers or extensive performance criteria
and evaluation processes for suppliers to achieve.
Increasingly common are the requirements for supplier declarations on
their finances and approach to risks, which could impact upon the purchaser
or business partners. It is all too common that suppliers or subcontractors who
do not have the same standards compromise a good internal risk and reputation
management system. A prime example of this is the damage suffered by cloth-
ing and footwear manufacturers when it was found that poor labour rights were
endemic in the business (e.g. forced, child and low-paid labour). Purchasers are
now engaging with their suppliers to ensure that minimum expectations of
behaviour on environmental, health and safety and labour issues are adhered to
by key suppliers. One of the more common environmental requirements is for
the supplier to be having an environmental management system like the ISO
14001 standard (see also Chapter 18).

Supply chain pressure: case studies
* Japanese companies are seeking a reduction in the complexity of their
supply/value chains. They are setting targets for reducing the number of
components by 20% per annum, which means fewer suppliers and a
greater opportunity for quality and environmental control;
Chapter 9 â€“ Shareholder value and reputational risk 219

* GAP Inc. has learnt from their reputational disaster and have removed
or refused to work with hundreds of overseas suppliers;
* Compaq Computers put potential suppliers on notice if their environ-
mental performance is substandard in any of five selection criteria;
* Hewlett-Packard, Lloyds TSB and Volvo send suppliers information
about their environmental commitments along with a self-assessment
questionnaire;
* IBM and Hewlett-Packard have environmental expectations included in
formal contracts and product or process specifications; and
* Crest Nicolson, the UK house builder, are seeking a reduction in their
number of suppliers but are increasing the percentage of suppliers with
environmental policies and/or management systems. They also hold
supplier of the year awards.

C Customers and their representatives
These risks are explored in more depth in marketing theory or analysis, as cus-
tomers are mostly silent and usually vote with their purchasing patterns. If cus-
tomers are dissatisfied with an organisation the business will tend to be unaware
until sales start to plummet. Brand reputation is also important here, as cus-
tomers are prepared to pay a premium for quality, reliability and durability.
Some companies confuse reputation management with public relations, cor-
porate â€˜green washingâ€™ (where the environmental management systems and
claims are part of the public relations (PR), or investor relations (IR) departments,
and are not embedded into the corporate culture of an organisation), or putting a
false picture of an organisation into the world. In truth, the general public and
NGOs place trust in a brand (which translates into sales) if they believe that an
organisation is honest. The financial sector also places a premium on trans-
parency, as they prefer planned disclosure of risks and bad news instead of sud-
den surprises. For example, a senior McDonaldâ€™s executive said recently that
changes to the fast food chainâ€™s menu were prompted not by a desire to appear
socially responsible but by customer demand. Many may perceive it as a defence
mechanism against the obesity issue, which has hit the courtrooms and the media.

D Direct action groups, including NGOs
The NGOs want to fight campaigns that they can win, attract new members and
gain sponsorship. The high profile NGOs, such as Greenpeace, like to win
people and they focus their attention on the major multinationals and their
suppliers. Smaller but focused NGOs can run effective campaigns on a single
issue; their members are passionate about the issue and will tirelessly fight their
corner. Good examples are local groups fighting planning permission against
the sighting of telephone masts and parents who are convinced their children
have suffered from the side effects of taking the MMR vaccine.
Part B â€“ Overview of the Economic Aspects of Business Risks
220

There has also been a rapid growth in the number of NGOs and their mem-
bership numbers. In the UK alone the number of people who belong to environ-
mental and social NGOs is large: the Royal Society for the Protection of Birds
(RSPB) membership is three times greater than the total members of all the polit-
ical parties combined; the National Trust (UK) has over 3 million members; and
the WWF-UK has over 330 000 members. Globally groups like Greenpeace are
hitting the 2.8 million members worldwide mark. One rationale for this is:
The most important reason for the growth in NGO power is the loss of credibility of gov-
ernments with respect to issues the public cares about. (When Good Companies Do Bad
Things, Schwartz, P., John Wiley & Sons, Inc. (1999), p. 137)

The UK is an interesting case study for analysis in this area as it has always
been at the forefront of environmental activism, and is home to some of the first
ever environmental legislation (e.g. the Clean Air Act 1956), and birth place to
some of the most active NGOs (e.g. Greenpeace, Friends of the Earth, Oxfam,
Christian Aid) and award winning businesses (five of Europeâ€™s six best reporters
were UK based in 2003 and the Co-operative Bank was voted the worldâ€™s best
reporter and most sustainable organisation).
This trend is continuing and is helping to set the responsible business
agenda, as NGOs seek to engage with businesses on a range of issues.
There is an increase in direct, and potentially hostile, action which is also
helping to force the pace of change. For instance, fund managers Phillips and
Drew were threatened by animal rights activists over their investment in
Huntingdon Life Sciences (which undertakes experiments on animals), result-
ing in a high profile and speedy sale of their interest in Huntingdon. In 1999,
the Bank of Scotland had its reputation badly damaged by its attempted part-
nership with the controversial US evangelist Pat Robertson, which resulted in
the temporary loss of important account holders and 5% of its market value.

E Employees and their representatives
It is self-evident that employees are easier to attract and retain if the organisa-
tion portrays a professional image. Employees can also be an effective source of
environmentally beneficial suggestions. Good industrial relations with
employees and their representatives (trade unions and committees) reduce the
incidence of lost production time and some case studies even indicate an
increase in overall productivity levels. It has also been noted that organisations
with the Investors in People (IiP) recognition are, on average, 1% more prof-
itable than those without the recognition.

F Financial institutions â€“ investors, insurers and lenders
Investors
Investors are beginning to pursue a socially responsible method of investment
(SRI). In the US this accounts for over $2 trillion in investment assets, or
Chapter 9 â€“ Shareholder value and reputational risk 221

approximately 17% of their investment universe. The proportion of UK funds
invested in this manner is far smaller but there was a large leap in SRI assets
from Â£23 billion in 1997 to Â£225 billion in 2001 mainly linked to the SRI
Pensions Disclosure Regulation and a number of insurance companies apply-
ing SRI criteria across all their equity funds. But â€˜ethical investmentâ€™ is becom-
ing increasingly important in pension fund management due to a huge rise in
public awareness and demand. Companies selected for adequate performance
against SEE criteria gain inclusion in a range of traded indices like FTSE4Good
series or Dow Jones Sustainability Index.
There is increasing demand for investment in the â€˜acceptableâ€™ stocks. The
Ethical Investment Research Services (EIRIS) figures on the UK retail SRI mar-
ket show an increase from Â£3570 million in June 2003 to Â£4555 million a year
later in June 2004. Additionally, more than 75% of UK adults believe that their
pension scheme should operate an ethical policy (Pensions and Ethical
Policies, EIRIS and NOP Solutions Survey (2 November 2001), www.eiris.org/
Files/PressReleases).

What is socially responsible investment (SRI)?
SRI is best defined as taking into account the social, environmental and
moral impacts of investments, as well as the financial consequences. The
UK Social Investment Forum phrases this as: â€˜Socially Responsible